Feldstein Says U.S. Fixing Cliff May Not Avoid Recession

Nov. 20 (Bloomberg) -- Harvard University economics
professor Martin Feldstein said the U.S. economy may fall into a
recession next year even if Congress and President Barack Obama
avert the full brunt of the so-called fiscal cliff.

“You are perilously close to the edge of another recession
even if we don’t go over the fiscal cliff,” Feldstein said in a
Bloomberg Television interview from New York. The end of payroll
tax cuts will reduce gross domestic product by about 1
percentage point in 2013, and other tax increases and spending
cuts may bring “over 2 percent of GDP tightening,” he said.

Feldstein was less optimistic than Federal Reserve Chairman
Ben S. Bernanke, who said a fiscal agreement “could help make
the new year a very good one.” Feldstein was one of two
economists to question the central bank’s leader after his
prepared remarks today to the Economic Club of New York.

The fiscal cliff refers to the $607 billion of tax
increases and spending cuts that will kick in automatically next
year unless Congress acts. The Congressional Budget Office said
in an Aug. 22 economic report that fiscal tightening of that
magnitude could cause a recession.

With the economy growing at less than a 2 percent rate,
that may be too small of a cushion to withstand fiscal
tightening resulting from a budget agreement, Feldstein said.

In response to Feldstein’s questioning about the impact of
a budget agreement, Bernanke said “there’s a range of
possibilities” for outcomes of the fiscal negotiations, though
“some plausible scenarios” would result in “relatively
contractionary fiscal policy overall.” The Fed chief said
“what I’m particularly concerned about is that we avoid the
full force of the cliff.”

Broadcast Interview

Feldstein, in his broadcast interview, urged that Congress
not raise tax rates and work to increase revenue by restricting
so-called tax expenditures: deductions and credits written into
the tax code for such things as mortgage interest and
investments in renewable energy.

The economist agreed with Bernanke’s assessment that
inaction on the fiscal cliff poses a “substantial threat” to
the recovery.

“The fiscal cliff would be a disaster,” he said. “As Ben
said, and as the Congressional Budget Office said, that would
push the economy into a serious recession.”

The economy expanded at a 2 percent annual rate in the
third quarter, though economists from Goldman Sachs Group Inc.
and Barclays Plc expect that to be revised to close to 3 percent
because of inventory accumulation and improvements in
international trade. Growth was 1.3 percent in the prior
quarter.

Feldstein, 72, is a former president of the National Bureau
of Economic Research and a member of the NBER committee that
declared the recession ended in June 2009. He formerly served as
chief economic adviser to President Ronald Reagan.